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Turnover Ratio

 

(1) Turnover ratio of mutual fund shows how quickly assets of the fund are changing. Actively managed investment funds have higher turnover ratio than passively managed funds, and normally turnover ratio is measured only for funds that are under active management. 

 

Usually people are encouraged not to invest in funds that have high turnover ratio because of few reasons. Firstly, such funds are used to have higher expenses (read about ‘total expense ratio’) and because of those expenses the performance of the fund is lower. Of course, most of the times fund manager tries to do a good job when he trades stocks more intense but in reality very few managers succeeds with it. Another reason, which depends on taxation system of the country, is that high turnover ratio may increase the taxes paid to the government by investors. 

 

Turnover ratio formula


Turnover ratio = Turnover of the fund / Assets of the fund

 

* Assets of the fund are calculated as average during the period which usually is one year. 

 

 

(2) Turnover ratio is often also applied to stocks or other securities to measure the liquidity of the security in relation to its worth in the stock exchange.  Basically, the turnover of a stock is related to trading volume during the period and market capitalization of that stock.

 

Turnover ratio formula


Turnover ratio = Value of shares traded / Average market capitalization

 

Or

 

Turnover ratio = Trading volume / Outstanding share number

 

 

(3) Also there are many turnover ratios that are related to the efficiency of the company. Such financial ratios measure the turnover of total assets, fixed assets, inventory, receivables or other in relation to sales of the company. These are the main turnover ratios:

 

 






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